The most popular small cap stocks (which we define as having market capitalizations between $1 billion and $5 billion) among hedge funds generate an average excess return of 18 percentage points per year, according to our research on 13F filings. Learn more about our research on small cap picks. We think that this is because these stocks are less widely owned by mutual funds and less frequently covered by the financial media, making them more likely to be undervalued or overvalued. We also like to review individual funds’ small cap picks and treat them as a list of initial ideas that investors can research further if a stock looks like a good value. Here are the five largest small cap holdings from Ken Heebner’s Capital Growth Management as of the end of December (or see the full list of Heebner’s stock picks):
The fund increased the size of its position in Herbalife Ltd. (NYSE:HLF) by 41% to a total of 3.4 million shares. Herbalife Ltd. (NYSE:HLF) has been quite volatile the past few months after billionaire Bill Ackman of Pershing Square accused the company of being a pyramid scheme and announced a large short position (find Ackman’s stock picks). The company does have very attractive value metrics- for example, the trailing earnings multiple is only 9- and has been experiencing decent growth in both revenue and earnings. Herbalife Ltd. (NYSE:HLF) also currently pays a dividend yield of over 3%.
Heebner and his team moved heavily into Foot Locker, Inc. (NYSE:FL) between October and December, closing the year with 2.7 million shares in their portfolio. The footwear retailer is another stock which is in clear value territory- the trailing and forward P/Es are 12 and 10, respectively- and yet has actually been doing well recently. Specifically, Foot Locker, Inc. (NYSE:FL) reported a 28% increase in net income in its most recent quarter compared to the same period in the previous fiscal year, and we’d say that it looks like an interesting value prospect.
Extra Space Storage, Inc. (NYSE:EXR), a real estate investment trust which owns and manages self-storage facilities across the U.S., was another of Capital Growth Management’s small cap picks. Real estate investment trusts are required to pay out a large share of taxable income to shareholders in order to preserve their favorable tax treatment. Extra Space Storage, Inc. (NYSE:EXR) recently increased its quarterly dividend payment to 25 cents per share, though this has left its yield at only 2.4%- considerably lower than can be found at other REITs.